The failure of a key element of President Obama’s health care law designed to lower costs and save taxpayers money could signal broader problems with the law’s approach to achieving savings.

In an attempt to create cost savings through more coordination and top-down efficiency, Obama’s law allowed for the creation of accountable care organizations (ACOs), federally financed organizations for Medicare which will establish “accountability for care” with incentivizes for reducing health costs. Since January 2012, the Centers for Medicare and Medicaid Services (CMS) has announced nearly 150 accountable care contracts, and more than 400 organizations have said they want to apply for 2013.

Under the ACO model, hospitals and doctors receive financial incentives for achieving quality gains and reducing health care spending. As ACOs go from theory to practice, however, hospitals and doctors are already struggling with new strategies and investments that they hope will achieve higher quality and lower costs.

A recent study published in Health Affairs found even dramatic clinical improvement within these initially approved ACOs improvement would create just 1.22 percent in savings for Medicare Parts A and B, well short of the 2 percent savings minimum aimed for under the federal Shared Savings Program.

If they don’t meet that benchmark, ACOs will miss out on millions of dollars in taxpayer-funded incentives—and the savings will have to come from somewhere else to make up the difference.

“Our analysis indicates that the savings needed to generate these payments will have to come from activities other than improvements in the clinical quality measures,” the study’s authors wrote.

Return to HMO Model

According to Joshua Archambault, director of health care policy at the Pioneer Institute, discussing ACOs is like asking 10 people to draw the Loch Ness Monster: every picture would look very differen,t and no one would know for sure what the real thing should look like.

“According to Leavitt Partners, 221 entities in 45 different states self-designate themselves as an ACO, up from 160 in 2011. These ACOs look very different from each other, and the success of any particular ACO model is still uncertain,” says Archambault. “Some claim ACOs are different from HMOs, but they operate on the same risk principle and use some form of capitated payments. Capitated payments are not intrinsically bad, but consumers must fully understand the arrangement before joining, and should not be forced into one.”

Archambault notes Medicare ran an ACO pilot program with some of the nation's most respected group practices. The results were disappointing.

“Only two groups achieved first year savings, only half of the groups did after three years,” Archambault said. “ACOs drive more power to hospitals. The concern is that greater market consolidation can raise the barriers to entry for new low-cost providers,” he said.

“The ultimate goal of ACOs is to integrate the care seniors received. In that regard, some have referred to ACOs as HMOs on steroids. The idea is to get doctors and hospitals to work together and split a bundled payment rather than the piecemeal fee-for-service payments that reward volume,” explains Herrick.

“As employees of hospitals, affiliated doctors’ offices can bill at higher ‘hospital outpatient’ rates. Moreover, as hospitals become the doctors’ boss, hospital executives can dictate the practice of medicine,” said Herrick. “Under traditional HMOs, physician employees were discouraged from ordering excess tests and unnecessary procedures. Under an ACO model, the incentive will be for hospitals to encourage doctor employees to perform excess tests and provide unnecessary care.”

Back to the ’80s

Dr. Roger Stark, a physician and health care policy analyst at the Washington Policy Center, says ACOs are just another method of handling global payment to providers, doctors, and hospitals combined, with the rules that accompany such payments.

“In reality, ACOs are simply the latest version of health maintenance organizations (HMOs). If Obama’s law is not repealed, expect most providers to wind up in some form of an ACO. So to figure out where this will go, think back to the 1980s and 1990s. HMOs do work to hold costs down, but patients and doctors hated them because of rationed care,” explains Stark.

Still Third-Party

ACOs will do little to ensure accountability because they continue the already-excessive reliance on third-party payers, says John Goodman, president and CEO of the National Center for Policy Analysis and author of Priceless: Curing the Healthcare Crisis. Goodman points out nearly 90 percent of all medical bills are never seen by the patients because they are paid by third parties such as insurance companies and federal programs like Medicaid and Medicare.

“With the ACA, we’ve suppressed normal market forces—there are no real prices, and even worse, there are perverse incentives. Without prices you can’t make proper decisions about health care. The ACA is a step in the wrong direction,” said Goodman.

Herrick agrees, and he says the way to achieve savings is through empowering consumers via health savings accounts, which reconnect the patient with the costs of health care, forcing them to be more discrete when it comes to spending.

“I can gain more control because I can shop around for the best price,” said Herrick.